A Brief History of Rand

ARTICLE A BRIEF HISTORY OF RAND 1 DANIEL S. STERNBERG TABLE OF CONTENTS INTRODUCTION ............................................................................................... 211 HISTORICAL ORIGINS: PATENT THICKETS AND INDUSTRY WORKAROUNDS .. 214 Patent Pools ........................................................................................ 214 The Sewing Machine Combination ............................................. 214 The Automobile Board of Trade ................................................. 216 The Manufacturers Aircraft Association ..................................... 218 Antitrust Scrutiny of Patent Pools ....................................................... 220 Standard Setting Organizations .......................................................... 222 ACADEMIC ANALYSIS: THE MEANING OF RAND IN THEORY ........................ 224 Defining RAND in the Standard-Setting Context ................................ 224 Calculating RAND Licensing Terms ................................................... 226 Reasonable Terms and Conditions Prong of RAND ................... 227 Economic Perspective ........................................................... 227 Legal Perspective .................................................................. 229 Nondiscrimination Prong of RAND ............................................ 232 THE SMARTPHONE WARS: THE MEANING OF RAND IN PRACTICE ................ 233 Historical RAND Appearances ........................................................... 233 RAND in Other Jurisdictions .............................................................. 236 Court Interpretations of RAND ........................................................... 238 PROPOSED RAND DEFINITION ....................................................................... 242 CONCLUSION ................................................................................................... 245 1 Daniel S. Sternberg received his J.D. from Cornell Law School, his M.B.A. from the Samuel Curtis Johnson School of Management at Cornell University, his M.S. from the Georgia Institute of Technology, and his B.A. from Clark University. The author would like to thank Professor Oskar Liivak, Tiffany Davis, Alex Douglas, Thomas Curry, Elliot Hales, Evan Mucha, Karina Pulec, Kirk Sigmon, Yifan Wang, and countless others for their helpful comments in writing and editing this Article. The author would also like to thank Russell Heller for providing additional materials on short notice and at a great distance. The author may be reached at [email protected]. 210 2014 A Brief History of RAND 211 INTRODUCTION The United States Constitution grants Congress the ability to give exclusive rights to inventors for their discoveries.2 This grant conjures images of an inventor selling his wares without fear of competition from rivals or the government. In many areas, this has been the case. If a person invents a better mousetrap, nothing prevents her from manufacturing or selling it in the open market. In other industries, for a manufacturer to sell his invention, the invention must work with existing tools and infrastructures. For example, if the invention was for an improved railroad car, the car must fit on preexisting railroad tracks. If the car does not meet this requirement, potential purchasers will not be interested and sales will falter. Put another way, in order to profit, the manufacturer must ensure that his product conforms to the prevailing standards in the industry. A standard may primarily come about in one of three ways. First, a government might identify common industry needs and pass legislation requiring companies to meet these needs.3 Second, a standard might come about due to natural market forces—consumers favor a single product family, making these products a de facto standard.4 Finally, a standard could be formulated by a private industry organization, typically referred to as a Standard Setting Organization (“SSO”).5 Historically, standards have been promulgated through government intervention.6 In the late nineteenth century, as a result of rapid developments in electricity, technological change began to outpace government intervention.7 The lack of standardization in this field became a worldwide problem causing increased costs to both purchasers of electric devices, who had to rely on expert consultants to ensure interoperability, and manufacturers, who were unable to automate their processes.8 As a consequence, industry participants and associations began to form committees with the express purpose of 2 U.S. CONST. art. I, § 8, cl. 8. 3 Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 CALIF. L. REV. 1889, 1899 (2002). 4 Id. 5 Id. at 1898. 6 See, e.g., Act of July 1, 1862, ch. 120, § 12, 12 Stat. 489, 495 (1862) (specifying that railroad tracks be a uniform width, to be determined by the President); An Act for Regulating the Gauge of Railways, 9 & 10 Vict. c. 57 (1846) (Eng.) (“[I]t shall not be lawful . to construct any Railway for the Conveyance of Passengers on any Gauge other than Four Feet Eight Inches and Half an Inch . .”). 7 See Mark Frary, In the Beginning. .: The World of Electricity: 1820-1904, INTERNATIONAL ELECTROTECHNICAL COMMISSION (Mar. 20, 2013), http://www.iec.ch/about/history/beginning (last visited Mar. 20, 2013). 8 Id. 212 B.U. J. SCI. & TECH. L. Vol. 20:2 creating standards to be used in the new and growing electrical field.9 The first standards these organizations promulgated were primarily concerned with terminology and unit standardization, but soon expanded into the standardization of various devices and components.10 With these early standard setting activities, the first SSOs were born. Over the course of the twentieth century, private standard setting has become more prevalent.11 As technology becomes more complex, new standards, regardless of how they are adopted, will become increasingly vital and will play a larger role in day-to-day life for most people.12 In a number of industries, products that implement standards have already become almost ubiquitous. For example, almost every electronic device on the market implements at least one industry standard.13 Regardless of how a standard comes into existence, there is one constant: standards likely trigger intellectual property concerns, usually in the form of a patent.14 For a single organization, or the government, a patent raises minimal concerns.15 An organization is typically in control of all its intellectual property and the government is immune from suit in many contexts.16 For an SSO, however, patents give rise to a number of issues. In a typical standard setting negotiation, engineers and technical experts will lead discussions with little to no input from non-technical teams.17 As such, the focus of the group will primarily be technical and center on technologies to be selected for a standard.18 After a standard is agreed upon, patent ownership and 9 Id.; see L. RUPPERT, BRIEF HISTORY OF THE INTERNATIONAL ELECTROTECHNICAL COMMISSION 1-3 (1956), available at http://www.iec.ch/about/history/documents/pdf/IEC%20History%201906-1956.pdf. 10 RUPPERT, supra note 8, at 4–5; D. T. Michael, The First IEEE Standard: IEEE Standards—The Early Years—1884 to 1900, IEEE POWER ENGINEERING REV., Nov. 1981 at 2, 2. 11 See Donald C. Loughry, The IEEE-SA: A New Era for Standards, 31 COMPUTER 106, 106, 110 (Feb. 1998) (discussing the formation of the IEEE-SA in order to streamline standards creation). 12 Id. 13 Lemley, supra note 2, at 1896 (“In the United States, electrical plugs and outlets are built to a particular standard for voltage, impedance, and plug shape.”). 14 See Priscilla Caplan, Patents and Open Standards, 15 INFO. STANDARDS QUARTERLY 1, 1-2 (2003). 15 See Lemley, supra note 2, at 1899–1900. 16 Id. 17 Caplan, supra note 13, at 2; Joseph Scott Miller, Standard Setting, Patents, and Access Lock-In: RAND Licensing and the Theory of the Firm, 40 IND. L. REV. 351, 369 (2007); François Lévêque & Yann Ménière, Vagueness in RAND Licensing Obligations is Unreasonable for Patent Owners 10 (CERNA Working Paper Series, Working Paper No. 2009-04, 2009). 18 See Damien Garadin, Standardization and Technological Innovation: Some Reflections on Ex-Ante Licensing, FRAND, and the Proper Means to Reward Innovators, 9 2014 A Brief History of RAND 213 licensing become much more important. A complex standard may be subject to a “patent thicket,” a set of patents owned by different SSO participants.19 In such a scenario, any owner of a patent necessary to the use of the standard (a standard-essential patent) has the power to block other SSO participants from the market by asserting its patent rights in order to “hold up” competitors.20 To ensure effective implementation of a standard and prevent this hold up, SSOs often require members to disclose any standard-essential patents and commit to licensing them on Reasonable and Nondiscriminatory (“RAND”) terms.21 The disclosure requirements, as well as the terms “reasonable” and “nondiscriminatory,” are often vague.22 This Article details the legal obligations generated by these requirements, with a focus on RAND licensing terms. Part I puts the RAND requirement into historical context. Part II (TILEC Discussion Paper, DP 2006-017, 2006). 19 Daniel G. Swanson & William J. Baumol, Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power, 73 ANTITRUST L.J. 1, 4-5 (2005-2006). Some SSOs attempt to avoid the patent thicket

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